Hodges-Lehmann Optimality for Testing Moment Conditions
This paper studies the Hodges and Lehmann (1956) optimality of tests in a general setup. The tests are compared by the exponential rates of growth to one of the power functions evaluated at a ﬁxed alternative while keeping the asymptotic sizes bounded by some constant. We present two sets of suﬀicient conditions for a test to be Hodges-Lehmann optimal. These new conditions extend the scope of the Hodges-Lehmann optimality analysis to setups that cannot be covered by other conditions in the literature. The general result is illustrated by our applications of interest: testing for moment conditions and overidentifying restrictions. In particular, we show that (i) the empirical likelihood test does not necessarily satisfy existing conditions for optimality but does satisfy our new conditions; and (ii) the generalized method of moments (GMM) test and the generalized empirical likelihood (GEL) tests are Hodges-Lehmann optimal under mild primitive conditions. These results support the belief that the Hodges-Lehmann optimality is a weak asymptotic requirement.
Canay, Ivan and Otsu, Taisuke, "Hodges-Lehmann Optimality for Testing Moment Conditions" (2011). Cowles Foundation Discussion Papers. 2132.